Tuesday, April 7, 2009

Good Time To Buy A House?

Very tentative signs have suggested a recovery in the housing market.

There have been monthly reports of price increases (by Nationwide, but not Halifax), mortgage approvals were up in February and March, and confidence has slightly improved. Admittedly, the rise in approvals is from a very low base. But, the outlook looks less grim than in 2008.

From a personal perspective, it is quite easy to see why the housing market crash has showed signs of easing. When I took my mortgage out in 2005 (btw it was a self certification mortgage several times income - the kind you would have no chance of getting now) I was paying £937 a month. Now I'm paying £435.

(This included extending the mortgage term from 32 years to 47 years. But, the fall in interest rates have made paying a mortgage a very attractive proposition.)

To rent a similar house in Oxford would cost in the region of £800 - £850 a month. You don't have to be an economist to see the attraction of buying rather than renting - If you can actually get a mortgage that is.

For me the great attraction of buying a house, was not the fact mortgage payments were cheaper than renting, it was the expectation moderate inflation would, over time reduce the real cost of the mortgage.

£900 a month was a lot, but I knew that if I kept renting, the price would keep rising by at least inflation. In retirement, the cost of renting would be almost prohibitive. But, if I got a mortgage, the payments would get easier to make as long as my real income rose. It also gave the chance of living rent free in retirement; this is as good as saving for a substantial pension.

Problems Ahead in Housing Market

  • In the last housing market crash, house prices fell for 4 years; the fall wasn't consistent, periods of rising prices proved to be false dawns. The present recovery in prices may be a similar effect.
  • In 2010 and 2011 as the economy recovers, and as quantitative easing takes its effect on inflation, interest rates could increase quickly. You would be a fool to budget on the expectation that interest rates would remain this low for any foreseeable time period.
  • Rising unemployment is likely to cause a rise in reposessions and depress the housing market. I can only see the unemployment figures worsening significantly this year. This rise in unemployment is likely to counter balance the improved affordability reducing demand for housing.
American house prices have been falling for over a year longer and still show signs of falling. But, the difference with America is that UK doesn't have the same surplus of excess houses (This surplus of newly built houses will be a problem for Ireland and Spain)

Whatever anyone says, I can't see the UK building many new houses. Demographic trends, such as move towards smaller households will increase demand faster than the supply of new houses. Thus in the long term, I can't understand predictions of 50% falls in house prices. I still think house prices will fall this year. But, in the UK, buying a house remains a sound investment for the long term


Anonymous said...

Seriously?! Hey, why don't you extend that graph back to 2000? Whoa! Prices have only now dropped to historical averages? There was a bubble? So I guess your premise is dog doo........

ricky said...

Buy a house in today's market can be complex and confusing. Although it seems that if prices are low, there are essential distinctions in the existing market to be understood if you are considering buying a home in the near future.

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